Wednesday, April 23, 2014

A few days ago, a friend sent me a 297-word graduation speech by economics Nobel laureate Thomas Sargent, delivered in 2007, that's been making the rounds. The speech consists of twelve precepts, delivered with economists' economy, that have been hailed as a distillation of "everything you need to know about economics," as Ezra Klein -- too fond of such sweeping overstatement since launching Vox -- put it.

The piece rubbed me the wrong way, not because its precepts are not true, but because their uber-message seems out of step with our slow-growth, post-meltdown, austerity-hog-tied economy. The upshot, as Josh Barro summarizes it this morning, is that there's no free lunch. The two bullet points that bugged me in particular were these:

4. Everyone responds to incentives, including people you want to help. That
is why social safety nets don't always end up working as intended.

5. There are tradeoffs between equality and efficiency.

To take the second first: sure. But as we've learned in the last few years, there's also tradeoffs between inequality and efficiency. When the top 1% grab 95% of the fruits of growth, they tend to 1) use their outsized capital unproductively, increasing their rents, 2) hollow out their customer base, and 3) extend their control over the political system, eroding checks on their own power and ensuring their further corruption.
As for the unintended consequences and poor design of safety net spending: these also occur. Housing projects may concentrate poverty; poorly designed welfare programs may create the wrong incentives. But these pitfalls are not an excuse not to try to alleviate poverty -- as Republicans use them in the U.S. We don't want the safety net to be a hammock -- but in the U.S., that's like worrying that we may drive our cholesterol too low. Our safety net is so much skimpier than that of our peer nations, and our poverty so much more widespread and intractable, that our concern should be studying how to replicate peer nations' success rather than breaking new ground in breaking down the support services we have.

In short, to pull this speech off the shelf in the United States today is to grab the fire extinguisher in response to a basement flood. Barro did a better job than I capturing the macro-inaptness of this lesson set just now:

In
fairness to Mr. Sargent, there was no demand gap in 2007, when he gave
his talk. But as the crash that soon followed showed, a special case can
quickly go from a footnote to the most important issue in economics —
and remain the most important issue for a large number of years.

You
can boil most of Mr. Sargent’s advice down to “There’s no such thing as
a free lunch.” But for the last six years, a huge demand gap has meant
that free lunches are everywhere, and we’ve spent most of that time
debating whether to eat them.

The free lunches left on the table in Barro's telling include extending unemployment benefits (this year) and infrastructure spending (since 2011). Read the whole thing.